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Abstract

This paper studies how credit expansions affect economic activity and quantifies the relative role of household and firm-side channels in accounting for the aggregate effects. Using data from the quasi-natural experiment of bank deregulation across U.S. states in the 1980s, we document that deregulation led to an expansion of credit and economic activity. We use this causal evidence to estimate a small open-economy heterogeneous-agent New Keynesian model that replicates the effects of this shock. In the long run, reduced borrowing costs for firms account for the lion’s share of the rise in output and employment. In the short run, the firm-side and household-side channels are equally important in driving the expansion of output and employment. Household demand is mostly associated with consumption whereas the firm side is mostly associated with investment. The finding that employment and production—including tradable output—experiences sustained growth after a credit expansion is consistent with the role we attribute to the firm-side channel.

Publication Type:	Article
Additional Information:	This is the peer reviewed version of the following article: Boar, C., Knowles, M. , Storesletten, K. & Wang, Y. (2025). Quantifying the Macroeconomic Impact of Credit Expansions. International Economic Review, which will be published in final form at onlinelibrary.wiley.com/journal/14682354. This article may be used for non-commercial purposes in accordance with Wiley Terms and Conditions for Use of Self-Archived Versions. This article may not be enhanced, enriched or otherwise transformed into a derivative work, without express permission from Wiley or by statutory rights under applicable legislation. Copyright notices must not be removed, obscured or modified. The article must be linked to Wiley’s version of record on Wiley Online Library and any embedding, framing or otherwise making available the article or pages thereof by third parties from platforms, services and websites other than Wiley Online Library must be prohibited.
Publisher Keywords:	credit market, New Keynesian, household heterogeneity, firm heterogeneity
Subjects:	H Social Sciences > HB Economic Theory
Departments:	School of Policy & Global Affairs School of Policy & Global Affairs > Economics
SWORD Depositor:	Symplectic Administrator

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